Two medical pioneers heading for the spotlight
By
Tom Bulford Jun 18, 2010
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Now that the age of austerity has begun, it should make sense for investors to look towards companies that claim to save money for their customers.
I say 'should' because in practice such companies often face an uphill struggle. For example, they face the challenge of the entrenched habits and scepticism of potential customers. They also have difficulty conducting proper 'through-the-cycle' costing, in which the upfront capital investment is offset by subsequent operational savings.
But two companies that have, over a number of years, managed to persuade customers of the cost-saving merits of their products are Deltex Medical (LSE: DEMG) and LiDCO (LSE: LID). Both of these companies target the large market for haemodynamic monitoring.
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Haemodynamic monitoring is the practice of monitoring the volume of blood and its movement within the body. This is critical to the healthy functioning of vital organs. If bloodflow is insufficient, the body will compensate by diverting the limited supply away from peripheral areas, such as the digestive, respiratory or urinary systems, and towards its essential organs. There is a considerable danger of this happening during surgery. Here, just a small loss of bloodflow to, for example, the kidney can cause serious damage. It can also lead to extended hospital stay – and of course more cost for the health authority.
But this is not a straightforward business. Monitoring bloodflow is not easy. Today the principal means of doing so is via the Swan-Ganz catheter (also known as the pulmonary arterial catheter). This is a device that is inserted through a major vein, such as the jugular, and sits in and around the heart. That this has been the standard method for 40 years attests to its merit.
But it still has some drawbacks. Since it is used intermittently, it cannot provide a continuous 'beat by beat' measurement of cardiac output. In addition, the accuracy of readings is dependent upon the technique of the user. There is also a danger that it will introduce infections into the body, or otherwise cause collateral damage.
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For years, medical device manufacturers have been looking to improve upon the Swan-Ganz catheter. They have come up with a series of non-invasive or minimally-invasive innovations.
In the non-invasive method, electrodes are placed at four locations on the body. As an electrical pulse is passed from one set of sensors to the other, its signal is varied by the flow of blood through the aorta. This signal, and its variance, is then monitored as a proxy for bloodflow.
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One of the minimally-invasive methods is based on the principle that bloodflow can be calculated by monitoring the pressure wave of a patient's pulse. LiDCO, for example, markets a system that requires a small dose of lithium chloride to be injected via a central or peripheral venous line. This is then recorded as it passes a sensor attached to peripheral artery.
A second minimally-invasive method involves transmitting an ultrasound wave towards the aorta from a probe that is placed in the oesophagus. The frequency at which the wave is reflected back is altered by the moving blood cells in the aorta. The changing pattern can then be used to calculate bloodflow. This is the basis for Deltex's CardioQ Device.
Both LiDCO and Deltex have achieved annual sales of some £5m to £6m. For years they have argued that their devices improve patient outcomes and (by avoiding complications during surgery) reduce the length of stay in hospital and the associated cost. Deltex, in particular, has regularly cited independent studies that appear to endorse its CardioQ.
But, despite these claims, both companies have tested the patience of investors and after ten years on AIM are yet to make a profit.
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The problem has been that they have been small players in a large market. This market is dominated by the American suppliers Edwards Lifesciences and ICU Medical, and Germany's Pulsion. Not only do these companies have established products, they also have big marketing clout.
LiDCO and Deltex have struggled to prove that their products are significantly superior to those already used. And the medical profession has been reluctant to switch to something new, with all the training that would entail.
But the tide may now be changing. An excellent recent note from Franc Gregori, an analyst at Charles Stanley, suggests Deltex and Lidco could at last be on the verge of an acceleration of sales, and even some profits.
Much will depend upon the National Health Service, which is now being incentivised to get patients in and out of hospital more quickly. This could lead to a renewed emphasis on haemodynamic monitoring.
Gregori prefers LiDCO, which is now trading at 20p, to Deltex, now at 11p. But for shareholders of both, some reward for their loyalty is well overdue. I'll be keeping an eye on these two.
• This article was first published in Tom Bulford's twice-weekly small-cap investment email
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